BankUnited, Inc. (BKU) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Fiscal Year 2018 BankUnited Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Susan Greenfield, Corporate Secretary. You may begin.

Thank you Nicole. Good morning and thank you for joining us today on our fourth quarter and fiscal year 2018 earnings conference call. On the call this morning are Raj Singh, our Chairman, President and CEO; Leslie Lunak, our Chief Financial Officer; and Tom Cornish, our Chief Operating Officer. Before we start, I’d like to remind everyone that this call contains forward-looking statements within the meaning of the U.S. securities laws. Forward-looking statements are subject to risks, uncertainties and assumptions and actual results may vary materially from those indicated in these statements. Additional information concerning factors that could cause actual results to differ materially from those indicated by the forward-looking statements can be found in our earnings release and our SEC filings. We do not undertake any obligation to update or revise any such forward-looking statements now or at any time in the future. With that, I’d like to turn the call over to Raj.

Thank you, Susan. Welcome everyone to our fourth quarter earnings call. We spoke to you 90 days ago, when it was a much nicer in New York. I was in New York two days ago; it was in the single digits. I’m in Miami for the last two days. Let me start by inviting all of you to come to Miami, spend some money and help our economy. The weather here is 72 degrees, it’s the high and 57 is the low. And actually there are a couple of Floridians here who are complaining that’s it’s too cold. We are very happy to come to you at the end of 2019 with our full final fourth quarter. This is a pivotal quarter for BankUnited for a number of reasons. I’ll walk through all of them. The final loan sale, the loss share as you all know was executed and the loss share for all practical purposes is behind us. We also sold substantially all of our taxi portfolio. When I said substantially all, a few hundred thousand coupled all those still left with us, but everything else is gone, that was also a very big deal something we’ve been looking on for some time. And that deal also closed in the last few days of December. We also announced and completed the second share of repurchase program which we announced at the last earnings call 150 million, it was all executed fairly quickly before the end of the quarter, that takes our share repurchase for the full year 2018 to $300 million, the first $150 million was executed over the first three quarters and the last $150 million in the fourth quarter given the weakness in the stock price it was a good time to be aggressive and buy back stock. Also yesterday the board met and authorised another $150 million of buyback. It is subject to of course Fed non-objection which we have or were putting in for, have already put it for and we expect to get that in a few days and we’ll commence that a few weeks, and we will commence that as soon as we have that non-objection to the Fed. This Fed non-objection is something new which [Indiscernible] completes three or four months ago all banks are required to get this map. And also, in November, the operating agreement that we’ve had with the OCC which they dates back to the time that we became an OCC bank back in 2012 was also terminated which accounts to the majority of the company as we close in on our ten year anniversary of forming the company. As far as the results are concerned, deposits grew by $1.2 billion for the quarter and $1.6 billion for the year. I think this probably was our biggest quarter. I’m looking at less than a year. This was our biggest growth quarter in the history of the company. More importantly than the total number was the fact that non-interest DDA grew by $208 million for the quarter. That takes DDA growth for the year to $550 million, which is like 80% growth in the year. To draw a comparison to 2017, I think in 2017 we grew only about $110 million in non-interest DDA. In other words, the growth in 2018 versus 2017 was five times as high. We have made demand deposit growth the most important target for us, and have been focused on it all year 2018, and we’ll continue to focus on this in 2019. We’ve had good success over there. One point to really note is a great number, but I will always tell you never to look at any one quarter and annualize that, you should always look at trailing four quarters and a better measure of performance, and we expect that kind of performance to continue and hopefully get better next year. Covered -- sorry non-covered loans and leases grew by $257 million for the quarter, despite the fact that we again had a record production quarter, net growth was lower because of a unprecedented levels of pay-off and run-off in the portfolio. For the year we grew $965 million, the non-covered loan and lease portfolio, and that these numbers are net off the $80 million or so that we sold in the taxi portfolio. So if you take that out, it will be roughly $80 million higher. Net income for the quarter came in at $52.4 million and there is a fair amount of noise in the number, primarily coming from the fact that the final loan sale usually the -- the loss share has contributed to our earnings. While there’s been a positive contributor this quarter, because of the way the accounting works as you will end loss share, it actually hurt our earnings to the tune of a few pennies. So loss – non-loss earnings would have come up -- come in at $0.59 compared to the $0.50 which is the GAAP number. The taxi portfolio, the final write down on that at the time of sale was $14 million pre-tax, which I think sells to about $0.09 or $0.10. Those are the two big items that greeted noise in this quarter, but I feel that a way, I think we had a pretty decent quarter compared to the fourth quarter of the previous year, or even compared to the third quarter of this year. NIM increased to just a tad over 4%, 4.01% up from 351 linked-quarter and 352 from comparable quarter in 2017. Leslie will get more into the NIM and explain to you in a little more detail. Cost of deposits increased to 152 basis points from 135 basis points in the third quarter and ninety four basis points fourth quarter of 2017. More importantly, we are seeing some stability in our betas. The betas were relatively flat from third and fourth quarter. If you dig deeper into different categories of loans, commercial betas maybe just a tad went down, and personal or consumer betas went up a tad. Overall, betas were relatively flat as we compare third quarter to fourth quarter. We are -- we are getting a sense that deposit competition might be rationalizing, and as the Fed starts to get a little more dovish, we may be reaching an inflection point. I don’t think we’re there yet. I think the move in December will still cause deposit cost to move up at least for the first quarter, probably even a little further. But there seems to be early signs that the competition might be getting a little more rational. Asset quality remains strong. Obviously NPAs dropped for us from 61 basis points to 43, just from the sale of the taxi portfolio. Net charge-offs for the year came in at 28 basis points, but 18 of the 28 basis points is attributable to taxi which is now behind us. Let me talk a little bit about 2019, and to what we see in the future for the next 12 months. I’ll start by just talking about the economy and capital markets. There seem to be two different indicators we’re getting. When we look at the economy and metrics both in New York and Florida, and even national metrics, and we look at our own customers balance sheet and the cash flows, we feel that the economy is doing very well. We don’t see any cracks in any part of our business and/or any of the economies, the regions that we play in. When we look at capital markets, we see some red signals pointing to a tougher economy as we go into 2019. Now those two things are diametrically opposite. And what we -- our stance has is that we have to be cautious and careful. But at the same time, we remain optimistic and the business continues with its momentum. We had a call last night to look at the pipelines of various businesses for them, at least for the first quarter. Pipelines are healthy, and from a credit perspective, we talked about that as recently as last week, and we still don’t see any signs of any cracks anywhere. So optimistic, but cautious is the tone that I would -- I would I would say that we have on the economy, and that forms our view for how we want to grow this year. I think growth, our best guess for balance sheet, both for loans and deposits is going to be in the mid-to-high single digits, and expense growth will be in the low single digits. I’m sure -- you talked last week and last quarter about a new initiative that we have taken on almost a journey I would say, where we have not hired [McKinsey] and another firm to help us think through areas of improvement. That project is a third of its way there. In terms of and a high level of figuring out where the opportunities might be, and that opportunities on both expense and revenue opportunities. We have just entered into the second phase of that project, which we’re calling the design phase where we actually take each of those opportunities and build detailed plan to run how and when we can achieve those, and validate them. And then the third stage, preferably implementation, which is along the stage, will start in April. In the way we have time timed this is, the second stage with the design phase will be done a week or so before the earnings call in April. And at the earnings call, we will give you detailed guidance around what are our targets, how are we going to get there, what are the initiatives that we’re talking about, what are the timelines for achieving them, and how we will track [Indiscernible] and what to do next. So I will leave you with that. The work is progressing well. There’s a lot of enthusiasm for it. It really can be summarized as a journey towards operational excellence. And – and like I said, it is both revenue and expense benefits. And, but what I will say is, it’s not a major change in strategy, it is not about launching new products and new businesses and new geographies. We obviously look at new opportunities as it is, but this is more about looking inward, that’s what we do. And how can we do it better, and where we -- where are we falling behind in terms of operational excellence, and going after those areas. That is a fair amount of automation that will come out of it, a fair amount of change in the processes, some organizational design changes, looking at our branch network and the like. While we are doing this, I think that there’s an important topic that we probably haven’t talked about enough in the past, but I will start mentioning this and giving you updates that these earnings call is that we continue to make investments in technology without which the business is moving so rapidly, the technology is moving so rapidly, that if you do not stay up with us, you will be irrelevant in two or three years. So when we launched this, this -- this project or this journey of program whatever you want to call it, I ask that we not try and hit these numbers by delaying important technology investments and improvements to our platform like the digital platform or the cloud migration that we’re doing, or the new commercial payments that we are in the middle of implementing them. All of that had to happen as originally planned, but we have to go find other areas where we could do better. So it is not about kicking the can down the road, it is actually finding true areas, where we can improve while continuing our piece of investments that are needed in the business. A couple of smaller things as we had mentioned to you over the years that there is a good chance that once loss share is over, we will look at our mortgage servicing operation, and take a hard look at that, whether it’s warranted that we’d be a mortgage servicer in the post loss share environment. We made a decision in November, that we will exit the mortgage servicing space and we started taking steps to that effect. We expect to not be a mortgage servicing business by April of this year, and there will be cost savings associated with doing that to the tune of approximately $7.5 million, $8.5 million. These are direct expenses. These are not things such as space and other beyond capacity that’s [Indiscernible] these are direct expense that we will be paid out. This is an annual number. This is not a 2019 number. You can imagine at 2019 it will probably be about half or maybe a little better than half this. The technology that supports the mortgage servicing operation, those contracts run through November I believe. So by December, we will have fully reached 7.5 to the 8.5 number and 2020 we will have it for the full year. With that, I will turn it over to Tom, who will talk about just in a little bit more detail how fourth quarter went and the year went. And then, Leslie will talk to you more about the P&L and also a little more detail on the guidance.

Great, thanks Raj. So, a little bit more detail on both the loan and deposit growth side, so for the quarter, first starting with loans and leases. As Raj mentioned, total non-covered loans actually grew by $336 million for the quarter when you set aside the $79 million sale of the taxi portfolio. If we look kind of within the business units, residential loans grew by $185 million for the quarter, which included $103 million of growth in the Ginnie Mae buyout loan segment. C&I business, and I’ll talk about C&I and then core commercial, which is kind of what we call our corporate banking and business banking teams. But the C&I book in total, grew by $110 million for the quarter that was net of $105 million in seasonal declines and mortgage warehouse outstanding and the reduction of $79 million in the taxi medallion portfolio due to the sale. So in our core commercial businesses, the corporate banking business offset that by growing by $243 million for the quarter and $75 million in the business banking team. So $318 million of total growth within the core commercial area, and very strong results in both the New York and Florida corporate and business banking markets. As we switch to CRE, the CRE portfolio had in aggregate declined by $74 million for the quarter with $178 million decrease in the multifamily asset class, and as you’ve seen in previous quarters, this was primarily focused in the New York market. On long term refinancings, we had $146 million decline in the New York multi-family market, and also an $18 million decline in construction and land loans, which was offset by growth in other segments predominantly office and industrial. Loans and leases in the commercial lending subsidiaries grew by $37 million, in aggregate $57 million of that was in Bridge, which is Bridge funding group or leasing a franchise company, which has continued to have a good year all year long, both on operating leases and in franchise financing. That was offset by a decline of $20 million in Pinnacle, our municipal leasing and finance subsidiary, which is kind of continued to be a bit under challenged due to the changes in tax rate structures and the competitive market that we see in that, that’s been sort of a continuation of their trend line through most of the year. As Raj mentioned earlier, commercial production, exclusive of mortgage warehousing and residential was very strong for the quarter at $1.4 billion and continues to be blended across a nice mix, and in this particular quarter, over 70% of the new production was in floating rates. So our desire to continue to develop a very balanced book, very well mixed across the portfolio segments continues to be successful. On the deposit side, as Raj mentioned, Q4 was a record quarter for deposit growth, and the trend in non-interest DDA continued. Non-interest DDA accounted for $208 million of deposit growth for the quarter, while savings and money market grew by $674 million and time deposits by $104 million, while interest bearing demand deposits were relatively flat. It was really nice to see as we had a really great deposit growth across all parts of the franchise in the national team, the Florida team, New York, Florida corporate banking. The $1.2 billion that Raj mentioned earlier was really broadly spread out across the entire company, which was really excellent to see. So that sums up the deposits for the quarter as well. And I’ll turn it over to Leslie.

Okay, good morning. Digging into a little bit more detail on the numbers and a little bit more detail about some of the forward guidance. First, a little bit more detail on the covered loan sale. We sold loans with an unpaid principal balance of $260 million plus a little over $5 million worth of real estate owned. The loans were sold at an average price of about $97. One pool of $150 million actually sold at 102, which speaks very positively about the loans that we retained our balance sheet and their quality because there are even higher quality than the ones that we sold. The aggregate impact on the P&L for Q4 of all of its activity related to the covered loans was a negative $9 million that included that pre-tax, included about $121 million of accretion, $129 million of indemnification asset, amortization and then about $1.6 million of just kind of true up that was reported in conjunction with the sale, particularly we had some gain sharing that we had to do on that pool that sold for one of two, so that turned that into a negative number in addition to the fact that there were some expenses associated with the FDA, with the sales that are not eligible for FDIC indemnification. The numbers are a little bit different than what the estimates that we had previously disclosed and what’s really driving that difference of a few million dollars is the higher sales price. And while that’s a little bit counter intuitive in the short run that higher sale price had a negative impact because it resulted in an even bigger amortization of the indemnification assets than we expected. The loans retained have a UPB of about $401 million, a little less than we originally projected due to some pay-offs that occurred in the intervening period and a carrying value of $201 million. The remaining estimated interest income to be recognized on the retained loan is our – our best estimate today is $287 million based on our most recent cash flow forecast. That’s a yield of 32.9% right now in that portfolio and for 2019, we’ll probably see about $60 million of that $287 come in. The loans have a weighted average life of 4.3 years that the tail is obviously much, much longer than that, because these were 30 year mortgages originated between 2001 and 2008. So the tail is much longer. That estimate also differs a little bit from what we did previously put out and that difference is really driven by changes in estimated prepayment speeds. A little bit of color on the net interest margin. Net interest income for the quarter was $295.1 million, a $56.2 million increase over the comparable quarter of the prior year. The NIM increased to 4.01% for the 3.52% and that increase was really driven by the increase in the yield on covered loans for the quarter. The acceleration of the timing of the final loan sale and the higher than previously modeled selling price resulted in an acceleration of accretion on those covered loans. The yields on both non covered loans and securities increased. The yields on non-covered loans increased to 4 18% for the quarter from 4 05% linked quarter and from 3.80% for the comparable quarter of the prior year. The tax equivalent yield on investment securities was 3.59% for the quarter, up from 3.41% for the immediately preceding quarter and from 2.89% for the fourth quarter of 2017. These increases are driven by coupon rate increases on floaters as well as some change in portfolio composition. The ratio of the portfolio actually declined slightly this quarter to 1.42%. The -- in comparison to the prior year, the yields on investment securities, non-covered loans and the NIM were each impacted by about 9 basis points by the change in the tax rate from 35% to 21%. Raj has already spoken about the deposit costs for the quarter. The increase in the cost of FHLB advances was driven by two things; one, just general market rate increases, and two over the course of the last couple of quarters, we’ve done some hedging and extended out the duration of those advances a little bit. A little bit of color around reserves and the provision. The total provision was $12.6 million for the quarter, that included $14 million related to the taxi medallion portfolio. The market to adjust to the carrying value of those loans to the sale price runs under [gas] through the provision for loan losses. So the market is what you’re seeing there even though part of that market is that rate related rather than purely credit related, but it all runs through the provision price. So the per underlying medallion averaged out to be about 155. One of the things we discovered when we did this sale in part because of the rate market I just mentioned is that loans are worth less than medallion, but that, that was the average price per underlying medallion. Excluding, taxi the provision for the quarter was actually a net credit of $1.4 million, mainly because of declines in historical net charge-off rates and lower provisioning for classified loans. We have some other classified loans resolved during the quarter. The ratio of the ALLL to total loans declined from the prior quarter end, largely due to the elimination of the reserves related to the taxi loans that came off when we sold the loans. We also did have some declines in loss factors and a reduction otherwise in criticized and classified loans for the quarter. However, I want to point out that the non-performing assets coverage ratio or the ratio of the ALLL to non-performing loans actually increased from about 60% at September 30th to about 85% at December 31st. It didn’t change anything about our ALLL methodology. And, a little bit more illumination on the forward guidance. Raj mentioned that we are currently expecting mid-to-high single digit loan and deposit growth for 2019 and low single digit expense growth. I wanted to be clear that none of this guidance includes any impact attributable to the journey that were the the transformation journey that we’re undertaking with consultants, that we’re going to give you more clarity on in April, so all of this guidance will be updated at that time, it is nothing is baked in. The expense guidance does include the expected consulting fees related to that engagement. So that is already baked in. But any cost savings that would come out of it or not in any way baked into that – [Indiscernible] Yes it does, it include what we believe will realize in 2019 from the termination the mortgage servicing operation. It includes the reduction in the deposit insurance expense, it includes the additional expenses that’s going to flow through the P&L in 2019 from some of the technology investments that Raj alluded to. All of that is baked in, but no cost savings from the project that we’re undertaking are included in that low single digit increased guidance. Currently we expect the NIM for the full year, and you’ll be so happy to know that this is the core NIM, it’s the only name that’s left. We expect to be between to 250 to 260 for the year for 2019. And that’s replicated on an assumption no Fed action in 2019. No hikes, no reductions by the Fed in 2019, a very flat curve. And what we believe this to be the relatively conservative assumptions about deposits, the behaviour. So that’s the underlying that gets us to that NIM. And the effective tax rate, I would say 23.5% to 24 % for the year, and around the provision, provisions sufficient to maintain the allowance ratio at current levels or slightly higher, still 50 basis points to 55 basis points. And we have no reason to believe there will be an increase in net charge-offs from the amount we saw this year excluding taxi. And at this point, I’ll turn it over to Raj for any closing remarks before we go to questions.

Thank you, Leslie. I’ll close by saying we are very happy with how far we’ve come. It’s been nine and a half years since we started the company. 2018 was an important year for us, but not nearly as important as 2019 will be. We are now in the bull slasher era, as we stand here three weeks into it. We closed out the quarter, strong deposits, like we said was a record growth DDA was strong, and that momentum continues into this quarter. So we’re excited. We keep our fingers crossed that the economy improves things we don’t control. But obviously, we monitor very closely. And with that, I will open it up for Q&A.

Thank you. [Operator Instructions] Our first question comes from the line of Ken Zerbe with Morgan Stanley. Your line is now open.

Great. Thanks, good morning.

Good morning.

I guess, I guess maybe starting off and I don’t know if we should call the former covered loan income or how you freeze up. Let me just say covered loans just for simplicity. I heard you Leslie on the $60 million in 2019, but I just want to make sure I understood the path of that going forward. I mean, it sounds like it’s just given the total amount of accretion. It sounds like the 60 probably goes into 2020 and maybe. I mean let’s say $50 million and then $40 million. I mean maybe it is. Is that a right -- is that sort of the right way to think about it, but also on there, if any of these covered loans prepay are we -- could we see that 60 jump in any given quarter for the year to $70 million or $80 million given accelerated prepayments?

The short answer is yes to both your question. I don’t have any exact numbers for the future years in front of me, but the trends, the way you’re thinking about does it’s the right way to think about it. And yes there will be a profit income if any of those loans prepay early on.

Does that 60 includes?

Includes coupon.

The coupon?

Yes. It includes the coupon. It includes -- but he is right, these loans prepaid, there is some acceleration. Now that includes our estimated – our estimated CTR is already baked in there. So it has to be prepayment in access of what we’re estimating before the number would be higher.

Got you. Understood. Okay. That helps. And then in terms the $150 million buyback that you just got approved for going forward. How quickly do you think you may want to execute on that 150? Could actually be in first quarter?

We will start like I said maybe in two or three weeks that approval. I will point to you the last two $150 million share repurchase. The first one was a stock was in the high 30s, it took us nine months to do. The second one was the stock closer to 30. It took us three months to do or 2.5 months to do. So it will depend on the stock price. We don’t try and call exactly what the stock price should be. We think of more dollar cost average is the best way to keep buying back stock. But we tend to do it faster, the stock is weaker and a little slower the stock is strong. So it all depends where the market is. In March Brexit is happening and the world falling apart, we might be doing it faster and if not we might be doing little slower. But it will start like I said in maybe two or three weeks.

Got it. Okay. And then because part of the reason I ask is just your CE Tier 1 ratio is obviously much higher than many of your peers. And Raj, do you -- when you think about like where you want be from capital perspective? I mean, it seems that you have a lot of flexibility not just this 150 currently, but going forward to execute several of these, let’s call it $150 million programs over the next year or two years, how aggressive would you want to be generally speaking with bringing down your CE Tier 1 or where would you like to end up at some point?

I don't want to talk about programs that have not been authorized. Having said that I will tell you that once this 150 is done we will go back to our board and sit down with them just like we did yesterday and talk about the next 150, because we do fully recognize that we have excess capital.

All right. Thank you very much.

Thank you. Our next question comes from the line of Ebrahim Poonawala of Bank of America Merrill Lynch. Your line is now open.

Good morning, guys.

Good morning.

Just first question, Leslie, in terms of your margin guidance 250 to 260; could you give us a sense of where that comparable number was in the fourth quarter? And if we do end up getting a rate hike, like do you see the margin at this point relatively neutral? Or would you consider yourselves liability-sensitive there, there’s maybe upside to the margin as the year progresses without any fed rate hikes. Any color there would be helpful?

Okay. So, I would say the comparable number for this quarter is probably right around 248 to 250, so it gives you a sense of where that is. In terms of – I think the thing that would make the most difference; Ebrahim is that the curve [Indiscernible] more than if the fed does or doesn’t hike once or twice. I think Raj express some level of optimism that if the fed takes a pause maybe some of the pressure will come off the deposit pricing, but that remains to be seen. We really have to wait and see if that does or does not materialize. And we do expect even given the December rate hike and some of the repricing that is likely to still happen in the back book that regardless our deposit cost will continue to go up for the next quarter or two. So, we’re still -- in terms of deposit or behavior and these levels of success that we can have with managing that rate of increase, that’s going to – that remains to be seen.

Got it. And just on the expense -- low single-digit expense guidance, could you tell us just to make sure I am looking at the right numbers what your base is when you look at the low expense growth for full year 2018? Is it 478, 480 million?

Full year 2018 excluding the amortization of the indemnification asset.

Okay. So relative to that you expect low single digit expense growth and it doesn’t include efficiencies coming out of this plan with [Mackenzie] that you’ll update us in April?

That’s correct.

Understood. And Raj just one last tie to that, give or take your earnings in ROE of -- ROTC of about 9% right now. When you think about the rate outlook you’ve laid out, means obviously you’ve gone through the consultant spend some time, like, what’s the reasonable level of ROTCE that shareholders or we should expect over the next year or 2020 without any big change up or down in the economy?

Ebrahim, I’ll answer your question in April, what I lay out in detail what those initiatives will be and what the numbers will be and add them to our ROE guidance.

Thanks for taking my questions.

Yes.

Thank you. Our next question comes from the line of Jared Shaw of Wells Fargo Securities. Your line is now open.

Hi, good morning.

Hi, Jared.

Good morning, Jared.

Just on the excess of the employee comp this quarter, did that reflect I guess some headcount reduction in anticipation of stepping away from the mortgage servicing business I’m guessing? Or is that a good base to grow from with the normal first quarter growth?

Really Jared, what you see in the comp number for this quarter is truing up our bonus and incentive accrual for 2018. I would expect that to go up in the first quarter for two reasons, because there’s always expense in the first quarter in comp because the payroll taxes and [HFAC] and 401-K contributions et cetera that are elevated in the first quarter and we’re not going to see most of that headcount reduction until some time into the second quarter.

Okay. And then in terms of the initiatives that Mackenzie is looking at, is there -- are there things around the loss share that could be potential cost savings beyond just the mortgage servicing side of the business?

No. I think on the mortgage servicing we’ve been working on that for a while and Mackenzie is not looking at that, that -- those plans are already done and they are in motion and will be realized like I said sometime in early second quarter.

Okay. And then just finally for me for the loans that were retained at December 31st, was a loss share officially close? Or is that still around until the…?

Yes. Officially it’s not closed yet. We’re still working on the paperwork, but for all practical purposes you should assume that it’s done.

Great. Thank you.

Thank you. Our next question comes from the line of Brady Gailey of KBW. Your line is now open.

Hey, good morning guys.

Hi, Brady.

Good morning, Brady.

So, when you take step back Raj, we were looking at a core NIM in the 250, 260 range. And honestly that still benefited a little bit just by the remaining mortgages that you retain that are yielding 30 some percent. I mean that’s 250 to 260 NIM is low relative to the industry. Over I mean, not just in 2019 but over future years how do you get that net interest margin up closer towards peer levels?

Yes. There are two ways to do it, Brady. You can either improve your interest income or you can reduce your interest expense. Interest income is improved by changing the business mix and taking more risk which I don't think is very wise this late in the cycle to go out on the risk spectrum. On the deposit side that’s something we’re working on and its not something can be achieve in the quarter or two or even a year. Last year we’ve generated 550 million of DDA. If you can have similar type of growth maybe even better this year that starts to help. And ultimately the thing that is beyond us, which is sort of the shape of the core which will also determine where your margins falls and which is something you can only break or not really work on. So those are three things that impact margin. I'm not interested in taking more risk and materially changing the portfolio and some of these starts to get into higher-yielding and high risk, name it, construction loans, subprime loans or whatever it might be. I think the time for that was probably five years ago but not today. But we are going to doubling up our efforts on deposit side and keep working on that, that’s what will change. It will not change suddenly 3% number tomorrow, but it will be a slow progression and we’ll get there.

All right. And then, as you all put in the press release the operating agreement with OCC was terminated, which I think you all been under that since you took over bank and it’s over a decade, if I remember right that agreement held you all to maybe around 9% Tier 1 leverage ratio. With that operating agreement now gone what flexibility does that give you? Obviously you can maybe a little more aggressive on the buyback and take capital a little thinner than you could. Otherwise what are the -- what's the impact of not being under that agreement anymore?

From a capital perspective, yes, it did have some constraints on capital, but we were still so far above those limits that that's not what was defining how much we can buy back. So after this 150 that we've announced if that operating agreement was in place today I don't think that would have changed at 150, it would just the same.

What it really does is give us more flexibility at the bank and how we would structure the capital structure at the bank level, because those constraints were at the bank not at the holding company level.

So the -- those sub debt that we issued a couple of years ago, I said, two or three years ago, we did it at the holding company which we pushed down this capital into the bank, if the operating agreement was not in place at that time you may have chosen to do it differently and maybe could have save a couple of bucks here and there. So it gives us that kind of flexibility not in overall capital levels because we're not that much disagreement with where capital levels need to be at the bank anyway. Also it takes away a lot of sort of you know quarterly reporting and there's a business plan we put out every year for the next there years and then we have to manage that business plan and that sort of administrative burden has lifted which is helpful.

All right. Great. Thanks for the color guys.

Thank you. Our next question comes from Stephen Scouten of Sandler O'Neill. Your line is now open.

Hey, good morning guys.

Good morning.

Good morning, Steven.

So you guys have seen really impressive non-interest bearing deposit growth year to-date which you noted, but that's also been an attention point for a lot of your peers and I think the industry as a whole. So, can you talk a little bit about what you guys might be doing differently or what you're capitalizing on that's made that such a such a nice out performance for the year and do you see that continuing?

It is a very impressive number, but the answer is going to be very boring and there is nothing that special. At the beginning of last year -- every year -- actually at the beginning of the year we set out goals for the year for the company to create a rallying cry all over the bank about what is important. And we started in January last year and said that priority number one, two and three is demand deposit growth. And then we followed it up with action by changing incentive plans to incent that growth and DDA as the number one criteria to get paid. So when you change the subject, you change messaging and you repeat it over and over again for a whole year you see result. So there is no magic to it. It really was just those two things.

Okay. Good. And maybe on the loan growth side and I'm not sure I missed a little bit of Tom's comment, so I apologize, but on the growth expectations I'm curious about what's embedded there with in New York City multifamily? Is that still expected to run down from here? Are we reaching a saturation point where that can kind of stabilize and/or maybe even grow?

We're not solving for any particular number. We’ll be happy to grow it from here. What we are solving for is a spread and structure that is acceptable to us and fits in what we have defined as a risk box that we want to play in. So we also get asked this question very often that there is some magical number or threshold and once we’ve reached that then we can start growing. It's actually not good at all. We could have been growing any time over the last year or could grow today if we find the right kind of spreads and structure. Now the spread did widen in the fourth quarter and we were getting very excited about it, but in December we saw the spread to go back. And more importantly the spreads, it has been structure longer-dated IOs are becoming more and more common and those are hard to do.

Yes. And you still say, I would add a lot of equity recapture available in the market as Raj mentioned a lot of duration. So we are making new multifamily loans. We've been making new multi-family loans every quarter for the last four or five quarters. It's just the overall environment today when you look at still what's available in the CMBS market and the LIFCO market just doesn't offer us for the most part an attractive thought process around why these are great assets for us right now.

I would like to make another point here that our portfolio is not completely floating, not completely fixed. I'm talking about the total portfolio of the bank. So as rate start going up and as our fixed-rate portfolio continues to reset or get refined and we put in new product without balance sheet growth there is a listed earnings that happens from that. So we will benefit from that which if you were completely floating rate balance sheet you would not, that benefit would have been captured already. So other banks that are more fix than us they would benefit even more obviously, but I’m kind of stating the obvious, but I just don't want people to forget that as these talking about multifamily loans, as these multifamily loans come up on their five-year anniversary they go from being in the low three coupons to low four coupons and that’s not growth, but that’s growth in earnings.

That’s helpful. And then maybe one last question. You mentioned Raj obviously record production this quarter. Can you give a little color in regards to production in the quarter relative to previous quarters as well as paydown numbers? And then if you think there is any impact there of loans coming into the bank with capital markets kind of been shutdown in the fourth quarter if that was impactful at all? Thanks.

Yes. It is – we generally don't get into production because it gets very complicated quickly between commitments and outstanding and changes in commitment levels. At a high level I will tell you the production environment was very strong in the fourth quarter. And the only place where we felt weakness was municipal finance that has been 2018 has been full year for that business line mostly because the spread of that business has really really come down and is not meeting our hurdles and we’re losing a lot of business. So that business had a week quarter and a weak year. But other than that mortgage warehouse has been a good growth business for us. Commitments have been going very nicely, but utilization levels in 2018 were meaningfully lower than 2017 and 2016 and that's probably also because of the environment mortgage production overall in the system has been much lower which makes utilization for warehouse lines. And one of the other things that we’ve talked in the past was as we compared to 2015 and 2016 our CRE or multifamily business in New York has not been same level of production that historically has been. So you think those three things out, everything else is hitting on all cylinders and production is very strong, unfortunately so as run-off, and that's why the net number ends up being just pennies on the dollar compare to the gross number. Even before you ask me the question, do I see that trend changing and what will it take to change that trend? I don’t know what it will take to change the trend. But that trend it has been very much with us for a good part of a year not longer and continues into the first quarter.

Great. Really helpful color, guys. Thanks and congrats on all the progress here, this year in the 2019.

Thank you.

Thank you. Our next question comes from the line of Steven Alexopoulos of JPMorgan Chase. Your line is now open.

Hey, good morning, everybody.

Good morning.

Good morning, Steven.

Just start on the NIM, so for starting points 248 to 250 and full year’s 250 to 260 implies the lift in NIM right through the year and 60 million benefit from the accretion will help. What's the underlying assumption for deposit cost within the guidance?

I think and Steven this is – I’m talking from memory, but I think its about 50 basis points increase in interest-bearing deposit cost.

Okay. So the moderation from what we saw in 2018? Okay.

Yes.

And then Leslie on the loan…

Yes. Moderation of increase in deposit cost, but part of that moderation is the fact that we expect the Fed is moving they way they have moved in 2018.

And as I said, we’re assuming no hikes, no reductions if the Federal just – that’s what baked into that forecast and we’ll update if need to be.

Thanks. And then the loan yields obviously quite a few moving parts of the loan yields start in the quarter you’ll now have the benefit of the retain loans. What should we thinking of is a good starting point for loan yields in 1Q which should be a pretty clean number?

Steven, unfortunately I don’t have that in front of me. I think my best expectation is it will go up from 4Q but I don’t actually have the details of what we’re projecting in fron of me at that granular level.

Okay. And then finally, Raj, you said the deposit environment was becoming more rational? I don’t know if you [Signatures] call, that [Joe] said, this is the worst deposit environment that he has seen in career. Competitors are offering 3%. What do you seeing that’s that's leading you to believe that its becoming more rational?

I’ll -- my Treasurer who is at the frontline of fighting the battle on deposits. When he calls me and says to me this was probably six or eight weeks ago that Raj, this month the calls that I got for exception pricing were sort of first time less than what I got the previous month. That's an inflection point that I'm referring to. And that has happened now two months in a row. That could all change tomorrow. But I'm referring more to my Treasurer’s mood at the end of the year versus for the last three years and he's been in crisis mode and he looks a little bit happier and he's smiling a little more than he used to.

In other words, purely anecdotal evidence.

Yes.

Okay. Got you. That's helpful. Thanks for the color.

Thank you. And our next question comes from Lana Chan of BMO Capital Markets. Your line is open.

Thank you. Good morning.

Good morning.

Did you guys mentioned how much mother servicing income you're getting and expected to decline in 2019 with exit?

Frankly, Lana, it has been completely insignificant. From quarter to quarter it runs about breakeven on the revenue side, not revenue net of cost, but it's just it's small, Lana, we just haven't had that much of it you know some quarters the fair value markets positive, some quarters it's negative, but over time it just hasn't really contributed anything meaningful on revenue side never been material and that’s why we don't disclose it.

And just curious, with the sort of Mackenzie review have you thought about or looked into the cost of or benefit of potentially de-leveraging a balance sheet to put to your securities and borrowings and using some of the freed up capital to buy back stock. Would that theoretically make more sense from given where the valuation is trading today?

Well, it’s not really part of the Mackenzie project. Those are numbers that we run all the time. So we're constantly running those numbers and making decisions about buybacks accordingly and we'll – to this point we continue to do the repurchase without having to do that but we will continue to include that in the analysis going forward.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Dave Bishop of FIG Partners. Your line is now open.

Hey, good morning guys.

Good morning.

Hey Raj, just in terms of the business environment you said pretty strong across the board. You've been hearing good things coming out of Florida region. Just curious how you could know what you're seeing just in terms of the health -- general health of the Florida economy versus maybe some of the other parts of the country operate in?

So, we obviously have a deeper view into Florida and also New York not just because of economic data we collect, but more importantly from the balance sheet and P&Ls of our clients that we review on an ongoing basis, right, at least once annually we look at every loan and see how our clients are faring. And that's what I'm referring to. So as these annual reviews come in we look at that, we look at the cash flow, we look at coverage ratios and we see things are stable to better. And yes that is a little bit of a backward-looking view because by definition we're looking at what happened to them yesterday not what will happen to them tomorrow, but it's an important view and it's a very detailed view. When we look at capital markets you could argue that's a forward-looking view and that's how we think about it and we try and marry those two things to form an opinion about where the economy is heading, which is why I said at the beginning of my remarks that we’re optimistic but cautious.

And I might add when you move around the state of Florida and you basically look at all the major markets that we're doing that we do business in and all the major industry segments most things are doing very well. I mean each markets are little bit different from Miami to Orlando to Tampa to Jacksonville for Lauderdale in terms of what are the main drivers of each of those economies, but as you go from city to city and we do client meetings and whatnot and meet with economists in the area in capital markets people the view across each of these major markets is optimistic for 2019.

Got it. And then from a modeling standpoint you mentioned the impact from the exit of the servicing group there. Any sort of impact from the revenue side we should think about as we head into 2019 as well?

No, not beyond the information we've given you around the yield on those retain loans. As I said a lot on the revenue side from the servicing operation its never been significant.

Got it. Thank you.

Thank you. Our next question comes from the line of Dave Rochester of Deutsche Bank. Your line is now open.

Hey, good mornng guys.

Hi, Dave.

On the deposit growth what are chances you could actually continue to see more elevated growth from here. It seems like you’re having a lot of success right now, you’re talking about deposit competition rationalizing. Is that mid to high single digit growth maybe a little bit conservative at least as deposit go?

Listen from your list to got years is the hardest thing to predict -- the cost growth is very hard to predict, unlike loans which are far easier. There can be surprise in loans too, but on the deposit side there is surprise everyday. And that’s why I said, don’t take the billion two for this quarter and annualize that and say, we're going to do 5 billion, that’s not going to happen. I think taking a longer term view is better and better predictor of our performance than any one quarter. I can give you a color for the first few days of this quarter, nothing that I said contradicts what we are seeing in the first few days of this quarter. It’s coming along fine. But deposit numbers can move around a lot on a week to week basis.

Yes. Appreciate that. And how was the large deposit team progression, the national team at this point? Are you guys happy with results so far? How large is the book? Just curious on that front.

We have not disclosed how large the book is. But I had said when we have brought the team on that success will not be measured by hundreds of millions by billions and I will tell you that we have been successful.

Great. And then I guess as all in cost go where are you seeing new deposits coming in today post the hike? And where are you seeing pricing the market to start money market and CDs?

Yes. If you want to grow money market you have the have a two handle on the consumer side. Business is difficult to say because it depends on the full relationship that you have. But on the consumer advertised price, the numbers starts with the – on – and if you’re at the 175 range you’re basically treading water, not growing, not shrinking, and if you below that you would shrink. In terms of one year CD or 13, 14 month CD, if you are in the 250 range you are flat and if you want to grow you have to be in the 260 to 270 range.

Got you. Great. And then I know you applaud a lot of the deposit growth and the securities this quarter, but you also pay down some borrowings as well, which helps reduce that interest cost you were talking about earlier. Is there any opportunity to paydown more borrowings? Do you have any more lumpy borrowing rolling off at higher rates? Is that going to be a focus this year at all?

It’s something potentially yes. We had a lot of cash this quarter, a few things. We sold – we had a lot of deposit growth, we sold the covered loans, we got the $300 million check from the Internal Revenue Service. So we had a lot of cash this quarter. So some of that we deployed into the securities portfolio and some of them we paydown some borrowings and we’ll continue to weigh those two opportunities and decide which makes the most sense. Yes. There are more borrowings. We could pay down, in fact, gives us more dues than buying bonds, we will.

Yes. And I – sorry if I miss this, but what was the overall average purchase rate on those securities you bought in 4Q and where you’re seeing reinvestment rates today?

I don’t have the numbers in front of me, but the average yield on what we brought for the quarter, I just don’t have that right here, but you did see the yield on the book appreciably during the quarter and lot of that was attributable to what we put on.

Yes.

December was good month to buy, you’re probably already know, that’s why in December which you were happy that the cash that we got from the list as Leslie mentioned all of that happened really in December, so we were lucky from a timing perspective that cash came in at just the time in [February].

Yes. And what part of that book is variable rate at this point. I know it was a decent chunk previously?

Its still a decent amount. I mean the duration is 142. So, that tells right there that a pretty significant portion of it is floating. I don’t have the number in front of me.

Okay, great. Thanks guys.

Thank you.

Thank you. And our next question comes from the line of Brock Vandervliet of UBS. Your line is now open.

Good morning. Thanks for the question. Telling [Charlie] here everything’s been answered I would say, other than with respect to see so, any sort of early read on that. And if not, when do you think you would be likely to release some sort of a guide on [CECL] implications?

Yes. So, let me say first of all I don’t have a number, that I’ve seen a number, but it’s not a number that I have enough confidence in to disclose it publicly at this point. A lot of work is still going on and a lot of analysis is still going on. I’m very comfortable with where we are, with respect to our implementation timeline, and we will start running the two methodologies parallel this quarter, the first quarter of 2019. In doing that, we will figure out what we don’t know, yet the whole world will learn what we what we missed, but we’re going to start at this quarter, so I’m highly confident that we’re in a good position to implement the standard on a timely basis. I doubt that we will disclose the number before the third quarter. So much of this is dependent on what your economic forecast is at the time you implement the standard, that has the potential to have a very material impact on the number. It’s going to swing pretty materially, if you are staring recession in the face as opposed to if you’re staring a period of economic growth in the face. So I doubt we’ll put a number out there before the end of the third quarter.

Okay great. Thank you.

Thank you. And that is all the questions we have today. I’d like to hand the call back over to Raj Singh for any closing remarks.

Thank you everyone for joining. We’ll speak to you in three months.

Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s program. You may all disconnect. Everyone have a great day.